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The burden of Taiwan’s stalled trade deal with China

Wall Street Journal

The Burden of Taiwan’s Stalled Trade Deal With China

By Rachel Rosenthal

8 May 2015

Like its Asian neighbors, Taiwan has been struggling with moribund exports as China’s economic growth slows and a pickup in the U.S. loses some steam.

Taiwan’s exporters could soon face another challenge: local opposition to further free trade with China.

Taiwan already is heavily dependent on China, which sucks in 40% of its exports. Many Taiwanese work on the mainland. Currently, the territory has a limited free-trade agreement with its neighbor, which the ruling Kuomintang party wants to extend to cover up to 5,000 items and services.

But protests against the deal last year, led by students, shut down Taiwan’s parliament and put such trade liberalization on the backburner. Many in Taiwan feel further dependence on China will erode its independence and give ballast to China’s claims on Taiwan’s sovereignty.

The problem for Taiwan is that rivals like South Korea are pushing ahead with their own deals with Beijing. Southeast Asia and China already have a trade pact.

Taiwan has expressed interest in joining the U.S.-led Trans-Pacific Partnership, a Pacific Rim trade deal that excludes China. But Taiwan’s giant neighbor is key for its IT businesses, which largely produce on the mainland.

The territory now risks getting left behind. And that’s bad news at a time when Taiwan’s electronics-focused exports already are facing headwinds.

Later Friday, Taiwan will release exports for April, which are expected to fall 5.6% on year after a decline of 8.9% in March, according to survey of eight economists polled by The Wall Street Journal.

Taiwan’s exports to China have been droopy this year, down 8.1% in March compared with a drop of 16.3% in February, though data from that month is colored by the Lunar New Year holiday.

A free-trade deal with China, cutting tariffs on up to 5,000 categories of goods shipped to China, compared with about 1,000 goods now, would give a big boost to the economy. A deal to allow trade in services also would open up China’s market.

Still, the mood in Taiwan remains opposed. Last year the Kuomintang got slammed in local elections due to criticism it has moved too close to Beijing.

With presidential elections in January, any progress on the trade deal this year seems unlikely, says Barclays economist Wai Ho Leong.

If the deal isn’t pushed through, the lost opportunity for growth and future foreign investment is significant, he says.

Meanwhile, Taiwan is unlikely to be able to sign bilateral trade agreements with other countries, as they fear offending China and losing business there. To date, Taiwan only has signed small trade pacts with countries like Singapore.

Exporters elsewhere in Asia are better positioned to benefit from fewer restrictions on trade with the world’s No. 2 economy. In November, leaders from China and South Korea signed the framework of an agreement on a free-trade deal, which should be finalized this year.

Taiwan’s exporters have good reason to be jittery. The two countries go head-to-head with many key goods like electronics, petrochemicals and steel, with 70% overlap in exports, according to Taiwan’s Ministry of Economic Affairs.

In the first quarter, exports to China from South Korea fell 1.5% on year in U.S. dollar terms, while exports from Taiwan fell 5.1% over the same period, according to data from HSBC Holdings PLC. Taiwan’s overall exports fell 4.2% in the first quarter, compared with a drop of 2.9% for South Korea.

The good news for Taiwan is that demand for its exports is closely linked to the U.S. consumer. While recent jobs and growth data has taken some shine off the U.S. recovery story, many economists still see the world’s biggest economy chugging ahead as the year progresses.

In the short-term, too, Taiwan’s product pipeline is looking more robust than South Korea’s, says Mr. Leong. While exports from the latter are getting a boost from Samsung Electronics Co.’s recent launch of the Galaxy S6 smartphone, a Windows 10 update from Microsoft Inc. and Apple Inc.’s iWatch launch will boost Taiwan’s electronics exports in the late summer.